By Sergio Lima.

Brazil’s real estate bubble is the center of  conversations in bars, restaurants, and barber shops. There is no way out.

Despite the fact that many informed Brazilians are aware about the issue, the overwhelming majority of the population isn’t. And this occurs not only because of their ignorance, but also because of the mass misinformation that is constantly broadcasted by the media. Brazilian “experts” like economist Ricardo Amorim (nicknamed “Cement Index Guy”) or the high-profiled Luis Carlos Mendonça de Barros (“Mendonção,” a protagonist of the Telecom privatization scandal), swear by their mothers that there is no housing bubble and will never exist in our country. And these two are merely exemplary. Brazil’s entire media is “campaigning” against a housing bubble, obviously. No news there.

But what is a real estate bubble? The “herd” says that it’s when the total housing credit to individuals achieves very high rates relative to the GDP of a country. Hence, they say, there is no bubble because Brazil’s mortgage/GDP ratio is only 5%. But this concept is a fallacy – it helps the “herd” to justify the high prices.

The real definition of a bubble is when property prices rise faster than (and decouple from) wage income growth, fueled by governments and bankers pushing and motivating this same population to continue buying. And the bureaucrats do that by either lowering interest rates or increasing financing terms (just compare the current 35-year terms against the standard 15-year in 2004). Just look at how our property prices doubled or tripled in a 4 or 5 years and you’ll have an idea of what a bubble really means.

Below I transcribe some numbers that explain the formation of the Brazilian bubble. Those who oppose this data, please do yourself a favor and destroy the Central Bank’s database. The data below represents the amount financed (by private and public Brazilian banks) for all housing units.

MM/YY / Total Units / Total Loans / Average unit value
June/12 – 408,522 – R$ 69,780,000,000.00 – R$ 170,810.00
June/11 – 452,761 – R$ 66,320,000,000.00 – R$ 146,484.00
June/10 – 353,313 – R$ 43,380,000,000.00 – R$ 119,939.00
June/09 – 289,351 – R$ 29,830,000,000.00 – R$ 103,092.00
June/08 – 240,418 – R$ 23,397,000,000.00 – R$ 97,322.00
June/07 – 140,820 – R$ 11,770,000,000.00 – R$ 83,588.00
June/06 – 85,212 – R$ 6,680,000,000.00 – R$ 78,392.00
June/05 – 50,760 – R$ 3,637,000,000.00 – R$ 71,650.00
June/04 – 48,434 – R$ 2,615,000,000.00 – R$ 53,990.00
June/03 – 31,220 – R$ 1,792,000,000.00 – R$ 57,399.00
June/02 – 29,897 – R$ 1.731.000,000,00 – R$ 57,898.00
June/01 – 38,977 – R$ 1,955,000,000.00 – R$ 50,157.00

Since 2009, both the total lending and the average unit value became “contaminated” by the insertion of the properties that are part of the low-income program “Minha Casa Minha Vida” (MCMV). In 2008, the average unit value was R$ 97,322, and it did not include the MCMV homes. From 2009 until March 2010, with the funding of 160,000 low-income houses (with values not exceeding R$60,000.00) that were part of the MCMV project, one can infer that the non-MCMV homes funded in Brazil between July 2009 and June 2010 were financed based on super high-valuations (in order to get the average unit price higher than the previous year).

A brief history of the bubble:
In 2004, our great populist, statesman Lula set his bubble building plan by making public banks like Caixa to increase its property financing term from 180 to 240 months, in addition to leveraging the FGTS accounts to lend more:

Then in 2006, the uber-populist passed Law 11,382 allowing banks to repossess properties from defaulters after only 3 months of late payments:

Between 2005 and 2007, as you all know, there was a flurry of IPOs of Brazilian real estate companies, which used their cash to over-leverage their balance sheets and purchase lands like there is no tomorrow:

In 2007, Lula’s Caixa, again, increases its home financing terms from 240 to 360 months: =

Between 2007 and 2008, bubble all over the world burst and the Brazilian builders ask for government protection. Obviously, the government says yes through a temporary measure MPV443) which became a law (no. 11,908):,lula-sanciona-lei-que-autoriza-caixa-a-comprar-construtoras,333503,0.htm

In 2009, at the request of builders, mainly Rubens Menin (MRV’s President), the government creates the MCMV (“Minha Casa Minha Vida”), nicknamed by many “Minha Casa Minha Divida (“My House, My Debt”).

And now, in 2012, our lovely president Dilma increases again the home financing terms from the already alarming (for Brazilian standards) 360 to 420 months! In other words, while criminals in Brazil are favored by loose laws to reduce jail times, the over-indebted borrowers see their purchasing “freedom” being vanished by mortgage payment terms that are longer than any one serious criminal can serve in Brazilian jails.

But one important fact gives me a very strong indication that the bubble has already burst last March: mortgage defaulters (SFH/BC).

Over 90 days / Up to 90 days
Jun/11 – 59,139 / 97,368
Jan/12 – 53,977 / 102,935
Jun/12 – 52,765 / 184,402

The number of “over 90 days” defaulters seem relatively stable, but notice how the “up to 90 days” jumped from 102k to 184k in just 6 months.

As this figure refers to delays of up to 90 days and the data is for the month of June 2012, I believe the market began to cripple in March 2012.

Source: Bolha Imobiliaria

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23 Responses to A brief history of the Brazilian real estate market and why the bubble may have started to burst last March

  1. Jack Ganoza says:

    It’s not only real estate.

    The huge bet in the oil exploration is starting to show fissures.

    Highly risky endeavours should have been handled by private capital as oppossed to socializing the risks.

    Years of woo-hoo chanting by the political class with the complicity of the financial press seem to have hyped up the realities of ultra-deep water oil production. According to experts’ views, and behind closed doors, the current state of ultra-deep technologies are not fully developed or matured, not even proven economically.

    Check producao-em-campos-6090265 for a little dosis of reality.

    The P-50 oil platform had been publicly advertised as the one enabling Brazil’s self-sufficiency in oil production.

    Get ready to start seeing a more realistic outlook -not overly optimistic- on that pre-salt business by the state oil company. A number of corrections and adjustments will have to be necessary as some have already been made by Petrobras’ new leadership.

    Investment figures, production output estimates, and an extended timetable are to come.

    The day Brazilians realize that the oil ‘business potential’ was exagerated, years will have been lost in feeding the pockets of opportunists, so-called captains of industry. This, while education, health and basic infrastructure all will have fallen even farther behind.

    But, for now, let’s all sweep the dirt under the carpet. And keep on pushing Carnival, novela, Copa, and the Olimpics in the news.

    It seems that the word ‘serious’ cannot be found on a Brazilian Portuguese dictionary. Unfortunately.

  2. jayme says:

    bubble will burst for sure, i agree with that.

    - however –

    prices will not go back to the late 90s levels as the delusional lunatics of the cult believe..

  3. McIvor says:

    Wait until Lula is re-elected. Only in Brazil.

  4. SALAZAR says:

    carnival is coming…it is always carnival…no worry… drink one mere “caipirinha’…no worry…

  5. Gaston says:

    At the beginning of this year we made a video on two bubbles. Tulipmania and 1720 Crisis
    Hope you like it

  6. Eduardo says:

    Uma duvida: o boom das imobiliarias esta sendo maior para as moradias de classe media e na minha visao o MCMV é um percentual bem pequeno em relação ao todo. Nao acha que o verdadeiro risco esta na tao falada classe C, que agora adquire imoveis a R$ 300k a rodo?

  7. Ad Maraf says:

    Hi there!

    Even the IPEA ( The Brazilian Economic Search Body) has admitted that there is a Brazilian Bubble:


    Despite that, it is wrong to compare Brazil with the USA.

    In the USA there was the Real Estate Bubble but in Brazil the Real Estate Bubble is not the only the one.

    In Brazil there is the BRAZILIAN FAMILY BUBBLE that includes all the debts from the family (Hiper valued Real Estates, cars that costs 3 to 4 times more the their prices, home furniture and electric supplies, clothes, air fares, hotels, food, health plans, home security, private schools and so on…) originated by the easy way to obtain credited to buy anything.

    Brazil is the biggest PONZI SCHEME on Earth created on the last years by the Government to attract capital from NAIVE foreign investors.


  8. Tomas says:

    Gentlemen, I can totally agree that the housing prices should not grow more then the income per capita, as the party won’t last longer the way things are going in Brazil. But the legislation reforms used as examples in the text are not all bad. We Brazilians always complain that our governments never reform our laws to adequate to our reality, and when it does, we complain against the reforms…
    The real estate business is not restricted to these big construction companies everybody keep mentioning. In any developed country, defaulters are evicted faster than in Brazil, for example, because if they keep living in that house even after stop paying the mortgage, NOBODY else will live there and that will only help to increase the demand for new homes, their prices and the investments risks. Off course the other examples show that banks and corrupts are using the new loan legislation to explore the ignorant and weak. Therefore the issue here is education, not legislation.
    In my opinion, the most damaging thing this and other governments do is not building the proper infrastructure everywhere its needed. Anyone who have been to developed countries noticed that there you can choose to live in downtown and pay the higher price or to live away, where you pay a smaller price but can transport yourself to work or around easily, thanks to the infrastructure built there(great freeways, trains etc).
    One of the reasons Brazilians are easily explored is that they have to dispute the ridiculous infrastructure these governments offer.
    When people can´t pay the mortgages, builders can´t make money building anymore. Less real estate will be available, maybe it will be not so dramatic for a short time, but after this stage the demand will exist again, will the prices remain the same?
    Lets remember that the USA, in its worst real estate phase, delivered almost one million brand new units in 2011, while our “competent” Brazilian building industry delivered less than 170 thousand new units in its best year ever, and this year will deliver much less.
    Median age in Brazil is still 29 years old, not 37 like in the USA or 45 in Europe.
    I don´t think Brazil its a land of home owners at this stage, but I believe people should afford rent and our rent legislation should be the most modern in the world, we need that. And as I pointed, without roads and decent public transportation, the banks will always choose where we’ll live.

  9. jay says:


  10. jay says:

    BINGO 2 :))

  11. jayme says:

    brazil doomsayers have this belief that everything is about to explode, in brazil case, to implode.. its just that, they been preaching this for the past 10 years, eventually it will happen, lets face it, its cyclical, it always does. my point here is.. what have you done to take advantage of the past 10 bonanza years ? very likely nothing.

    i – personally – know people who have been buying properties and reselling since 2009 when many of the bubble cult leaders were preaching “it will pop tomorrow..” well, those who were buying land and not believing in profecies made a killing, three years have passed by now, this very same guy in getting into a franchise.. guess what the experts once again came out the closet to say “are you crazy ? there is a floooood of new franchises you will go bankrupt..” now, the funniest part is the doomsayers, usually got money on saving account, are federal employees, or got no money at all to put on anything..

    long story short, it all comes down to – “who are you taking advises from?”

    people saying the end is tomorrow before dawn are usually the idiots who dont do hack of their lives, dont take risks, are always scared and awaiting for an end that never comes..

    wake up.. and do something!
    put down you money, your sweat in something you belive its going to prosper..
    damn.. im sounding like a motivational speaker..
    but no.. im not.
    its just that piss me off all those “OMG, prices are too high.. we gonna die…”

    yeah.. okay.
    good luck you all :))

  12. Rodrigo Rodrigues says:

    Eduardo, a maneira mais simples de voce detectar se a propiedade que voce esta comprando esta overvalued or overpriced, e ver o rate of return no rentals , Exemplo
    Pagou a vista em um ap ou casa por exemplo 100k
    100k paid alugou a propiedade e teve um retorno de 20k anual depois de taxas , 20% de retorno
    Segue uma tabela simples:
    15 to 20% return , buy it ( Not a bubble , buy it !)
    10 to 15% return still a good buy , still not a bubble )
    10% and below ,begginning of a bubble
    3% to 4% example Rio, Sao Paulo, major capitals in general , extreme bubble !! Dont even. Touch !! Too much liability!!

  13. Rodrigo Rodrigues says:

    House prices will keep falling in the areas where prices are still 
    dangerously high compared to incomes and rents. Banks say a safe 
    mortgage is a maximum of 3 times the buyer’s annual income with 
    a 20% downpayment. Landlords say a safe price is set by the rental 
    market; annual rent should be at least 9% of the purchase price, or 
    else the price is just too high. Yet in affluent areas, both those 
    safety rules are still being violated. Buyers are still borrowing 6 times 
    their income with tiny downpayments, and gross rents are still only 
    3% of purchase price, even after recent price declines. Renting is a 
    cash business that proves what people can really pay based on 
    their salary, not how much they can borrow. Salaries and rents 
    prove that affluent neighborhoods are still in a huge housing bubble. 
    Anyone who bought a “bargain” in those areas last year is already 
    sitting on a very painful loss.

    On the other hand, in some poor neighborhoods, prices are now so 
    low that gross rents exceed 10% of price. Housing is a bargain for 
    buyers there. Prices there could still fall yet more if unemployment 
    rises or interest rates go up, but those neighborhoods have no 
    bubble anymore.

    Because it’s usually still much cheaper to rent than to own the same 
    size and quality house, in the same school district. In rich 
    neighborhoods, annual rents are often 2.5% of purchase price while 
    mortgage rates are 5%, so it costs twice as much to borrow the 
    money as it does to borrow the house. Renters win and owners 
    lose! Worse, total owner costs including taxes, maintenance, and 
    insurance come to about 9% of purchase price, which is more than 
    three times the cost of renting and wipes out any income tax 
    The only true sign of a bottom is a price low enough so that you 
    could rent out the house and make a profit. Then you’ll know it’s 
    pretty safe to buy for yourself because then rent could cover the 
    mortgage and ownership expenses if necessary, eliminating most of 
    your risk. The basic buying safety rule is to divide annual rent by the 
    purchase price for the house:

    annual rent / purchase price = 3% means do not buy, prices are too 
    annual rent / purchase price = 6% means borderline
    annual rent / purchase price = 9% means ok to buy, prices are 
    So for example, it’s borderline to pay $200,000 for a house that 
    would cost you $1,000 per month to rent. That’s $12,000 per year in 
    rent. If you buy it with a 6% mortgage, that’s $12,000 per year in 
    interest instead, so it works out about the same. Owners can pay 
    interest with pre-tax money, but that benefit gets wiped out by the 
    eternal debts of repairs and property tax, equalizing things. It is 
    foolish to pay $400,000 for that same house, because renting it 
    would cost only half as much per year, and renters are completely 
    safe from falling housing prices. Subtract HOA from rent before 
    doing the calculation for condos.

    Although there is no way to be sure that rents won’t fall, comparing 
    the local employment rate (demand) to the current local supply of 
    available homes for rent or sale (supply) should help you figure out 
    whether a big fall in rents could happen. Checking these factors 
    minimizizes your risk.

    Because it’s a terrible time to buy when interest rates are low, like 
    now. House prices rose as interest rates fell, and house prices will 
    fall if interest rates rise without a strong increase in jobs, because a 
    fixed monthly payment covers a smaller mortgage at a higher 
    interest rate. Since interest rates have nowhere to go but up, prices 
    have nowhere to go but down. The way to win the game is to have 
    cash on hand to buy outright at a low price when others cannot 
    borrow very much because of high interest rates. Then you get a 
    low price, and you get capital appreciation caused by future interest 
    rate declines. To buy an expensive house at a time of low interest 
    rates and high prices like now is a mistake.
    It is far better to pay a low price with a high interest rate than a high 
    price with a low interest rate, even if the mortgage payment is the 
    same either way.

    A low price lets you pay it all off instead of being a debt-slave for 
    the rest of your life.
    As interest rates fall, real estate prices generally rise.
    Your property taxes will be lower with a low purchase price.
    Paying a high price now may trap you “under water”, meaning you’ll 
    have a mortgage debt larger than the value of the house. Then you 
    will not be able to refinance because then you’ll have no equity, and 
    will not be able to sell without a loss. Even if you get a long-term 
    fixed rate mortgage, when rates inevitably go up the value of your 
    property will go down. Paying a low price minimizes your damage.
    Because buyers already borrowed too much money and cannot pay 
    it back. They spent it on houses that are now worth less than the 
    loans. This means most banks are actually bankrupt. But since the 
    banks have friends in Washington, they get special treatment that 
    you do not. The Federal Reserve prints up bales of new money to 
    buy worthless mortgages from irresponsible banks, slowing down 
    the buyer-friendly deflation in housing prices and socializing bank 
    The Fed exists to protect big banks from the free market, at your 
    expense. Banks get to keep any profits they make, but bank losses 
    just get passed on to you as extra cost added on to the price of a 
    house, when the Fed prints up money and buys their bad 
    mortgages. If the Fed did not prevent the free market from working, 
    you would be able to buy a house much more cheaply.

    As if that were not enough corruption, Congress authorized vast 
    amounts of TARP bailout cash taken from taxpayers to be loaned 
    directly to the worst-run banks, those that already gambled on 
    mortgages and lost. The Fed and Congress are letting the banks 
    “extend and pretend” that their mortgage loans will get paid back.

    And of course the banks can simply sell millions of bad loans to 
    Fannie and Freddie at full price, putting taxpayers on the hook for 
    the banks’ gambling losses. Heads they win, tails you lose.

    It is necessary that YOU be forced deeply into debt, and therefore 
    forced into slavery, for the banks to make a profit. If you pay a low 
    price for a house and manage to avoid debt, the banks lose control 
    over you. Unacceptable to them. It’s all a filthy battle for control over 
    your labor.
    This is why you will never hear the president or anyone else in 
    power say that we need lower house prices. They always talk about 
    “affordability” but what they always mean is debt-slavery.

    Because buyers used too much leverage. Leverage means using 
    debt to amplify gain. Most people forget that debt amplifies losses 
    as well. If a buyer puts 10% down and the house goes down 10%, 
    he has lost 100% of his money on paper. If he has to sell due to 
    job loss or a mortgage rate adjustment, he lost 100% in the real 
    The simple fact is that the renter – if willing and able to save his 
    money – can buy a house outright in half the time that a 
    conventional buyer can pay off a mortgage. Interest generally 
    accounts for more than half of the cost of a house. The saver/renter 
    not only pays no interest, he also gets interest on his savings, even 
    if just a little. Leveraged housing appreciation, usually presented as 
    the “secret” to wealth, cannot be counted on, and can just as easily 
    work against the buyer. In fact, that leverage is the danger that got 
    current buyers into trouble.

    The higher-end housing market is now set up for a huge crash in 
    prices, since there is no more fake paper equity from the sale of a 
    previously overvalued property and because the market for 
    securitized jumbo loans is dead. Without that fake equity, most 
    people don’t have the money needed for a down payment on an 
    expensive house. It takes a very long time indeed to save up for a 
    20% downpayment when you’re still making mortgage payments on 
    an underwater house.

    It’s worse than that. House prices do not even have to fall to cause 
    big losses. The cost of selling a house is kept unfairly high because 
    of the Realtor® lobby’s corruption of US legislators. On a $300,000 
    house, 6% is $18,000 lost even if housing prices just stay flat. So a 
    4% decline in housing prices bankrupts all those with 10% equity or 

    Because the housing bubble was not driven by supply and demand. 
    There is huge supply because of overbuilding, and there is less 
    demand now that the baby boomers are retiring and selling. Prices 
    in the housing market, even now, are entirely a function of how 
    much the banks are willing and able to lend. Most people will borrow 
    as much as they possibly can, amounts that are completely 
    disconnected from their salaries or from the rental value of the 
    property. Banks have been willing to accomodate crazy borrowers 
    because banker control of the US government means that banks do 
    not yet have to acknowledge their losses, or can push losses onto 
    taxpayers through government housing agencies like the FHA.
    Because there is a massive and growing backlog of latent 
    foreclosures. Millions of owners have simply stopped paying their 
    mortgages, and the banks are doing nothing about it, letting the 
    owner live in the house for free. If a bank forecloses and takes 
    possession of a house, that means the bank is responsible for 
    property taxes and maintenance. Banks don’t like those costs. If a 
    bank then sells the foreclosure at current prices, the bank has to 
    admit a loss on the loan. Banks like that cost even less. So there is 
    a tsunami of foreclosures on the way that the banks are ignoring, 
    for now. To prevent a justified foreclosure is also to prevent a 
    deserving family from buying that house at a low price. Right now, 
    those foreclosures will wash over the landscape, decimating prices, 
    and benefitting millions of families which will be able to buy a house 
    without a suicidal level of debt, and maybe without any debt at all!
    Because first-time buyers have all been ruthlessly exploited and the 
    supply of new victims is very low. We were all corrupted by the 
    housing boom, to some extent. People talked endlessly about how 
    their houses were earning more than they did, never asking where 
    all this free money was coming from. Well the truth is that it was 
    being stolen from the next generation. Houses price increases don’t 
    produce wealth, they merely transfer it from the young to the old - 
    from the coming generation of families who have to burden 
    themselves with colossal debts if they want to own, to the baby 
    boomers who are about to retire and live on the cash they make 
    when they downsize.
    House price inflation has been very unfair to new families, especially 
    those with children. It is foolish for them to buy at current high 
    prices, yet government leaders never talk about how lower house 
    prices are good for American families, instead preferring to sacrifice 
    the young and poor to benefit the old and rich, and to make sure 
    bankers have plenty of debt to earn interest on. Your debt is their 
    wealth. Every “affordability” program drives prices higher by pushing 
    buyers deeper into debt. Increased debt is not affordability, it’s just 
    pushing the reckoning into the future. To really help Americans, 
    Fannie Mae and Freddie Mac and the FHA should be completely 
    eliminated. Even more important is eliminating the mortgage-
    interest deduction, which costs the government $400 billion per year 
    in tax revenue. The mortgage interest deduction directly harms all 
    buyers by keeping prices higher than they would otherwise be, 
    costing buyers more in extra purchase cost than they save on 
    taxes. The $8,000 buyer tax credit cost each buyer in 
    Massachusetts an extra $39,000 in purchase price. Subsidies just 
    make the subsidized item more expensive. Buyers should be rioting 
    in the streets, demanding an end to all mortgage subsidies. Canada 
    and Australia have no mortgage-interest deduction for owner-
    occupied housing. It can be done.

    The government pretends to be interested in affordable housing, but 
    now that housing is becoming truly affordable via falling prices, they 
    want to stop it? Their actions speak louder than their words.

    Because boomers are retiring. There are 70 million Americans born 
    between 1945-1960. One-third have zero retirement savings. The 
    oldest are 64. The only money they have is equity in a house, so 
    they must sell. This will add yet another flood of houses to the 
    market, driving prices down even more.
    Because there is a huge glut of empty new houses. Builders are 
    being forced to drop prices even faster than owners, because 
    builders must sell to keep their business going. They need the 
    money now. Builders have huge excess inventory that they cannot 
    sell at current prices, and more houses are completed each day, 
    making the housing slump worse.
    Always remember this ,home ownership is a big illusion created by 
    the masterminds,the free and clear home owners are the real ones, 
    and the other ones might own some equity , a lot people are 
    homedebtors not homeowners it ‘s very important to understand 
    these simple concepts .

  14. zippolino says:

    I’m curious as to what the “agio” or premium the housing market is paying versus replacement value, including land/”terreno”, liscencing/”alvara” and other construction costs? Does it represent a reasonable value for current and future housing demand and the buyers ability to pay up? The rising mortgage default index seems to be telling us no in the short term , but ok on the long, with the market, as usual, anticipating that the duck/”pato” will be paid by someone other than the house buyer……..Vamo que vamo…..

  15. Gieke says:

    thanks for the extensive comment, what you write is very true

  16. Jan T Seneca says:

    “the bubble may have started to burst last March”?!

    It is a characteristic of a bubble: if it cracks then you know all about it.

    When one must express themselves as “the bubble may have burst started two last March” is the one thing that is certain: you can call it what you want but not a bubble. Call it a price drop, a steep decline but never a bubble burst. A bubble burst slams hard with immediate effect. That is a buble burst! The americans are happy to tell you all about it.

  17. Brazilian Bubble says:

    Jan, prices in US peaked in 2006, they actually started to fall in 2007 but no one noticed until mid-late 2008.

  18. Andre Kenji says:

    The bubble is more complicated than it looks. The problem is not Minha Casa Minha Vida. The problem are the more expensive houses. There is a bubble, but there is no houses being built in excess.

  19. Patricia says:

    Jayme, who told you you look like a motivational speaker?

    The question is not if you bought any real estate in the last 10 years, the question is, current real estate prices still have room to grow? if the answer to you is YES.. JUST KEEP BUYING MY DEAR MOTIVATIONAL SPEAKER LIKE YOU CALL YOURSELF…are you a carioca? cariocas love to think they are smarter then the rest of the world but always forget 80% of Rio de janeiro is like Paraguay.

  20. carlosazevedo says:

    The last 9 months figures, display an acceleration on the deterioration of liquidity to service debts or meet financial obligations; in other words the ability to Borrow from Peter to pay Paul. This RESISTANCE to avoid the inevitable is common place when individuals – borrowers- with too much leverage are unable to meet their obligations and start to juggle in order to find ways to maintain their assets intact.

    It is possible that individuals that were able to shift their mortgage/ lines of credit/ credit card from one institution to another, are starting to run out of options. One cannot make a hard statement here regarding the inner works, but it does show the signs of accelerations on permanent defaults.

    One can only renegotiate debts for so long. Once it comes to the end, there is nothing else to be done than default. Every country has its particulars procedures. In America, for instance, the solution often is to file for Chapter 11, Bankruptcy. I don’t know in Brazil what are the possibilities.

    Re- service debts in whatever form they come – credit card, loans, mortgage, car loans – is a process. Overseas, principally in Northern Europe, it is not an easy process. Leverage is not easy to get.

    Every country different, with its own laws and regulations. Germany, Holland and Scandinavia principally not easy to overstretch. Tight controls.

    One thing seems common everywhere: people go to extremes before surrendering to the facts. I guess It is part of our human nature to try fight hard for things we have been able to achieve or acquire. It is ours and we take pride on it. A home is a significant step and means stability and security. To have to give it up is difficult.

    Therefore is more than natural to try to maintain the assets we have acquired. There is always hope things will get better, and people hold to them as long as they can. A mix of bag of feelings, that gives rise to some steep corrections.

    Unfortunately, in the buying process, many take an optimistic view – or don’t account for variables. That is often the problem. But once signed, there is not much to do besides meeting the obligation.

    In Brazil, it seems that people are acquiring assets far beyond their means.

    At this juncture in financial markets across the globe, interest rate and currency speculators, a very interesting group of speculators with sharp eyes, knowledge and sensible to risks, are placing some interesting bets on what could happen with Brazil’s currency, interest rates and country risk.

    When these professionals see an opportunity they will not take prisoners; They will seize the opportunity! There is no place for Being Politically correct in such situation.

    If currencies get absurdly devalued, even causing severe fractures to a country economy, they will do what they are supposed to do: Seize the opportunity. It has happened in other continents and with strong economies; it can happen to Brazil without question.

    Using a metaphor here, I think that If the fine prints, the small letters of what they are writing is correct, we would have some interesting months ahead until July 2013. Nothing is set in stone, but if things would go sour overseas – Europe, US and China – That would add oil to the fire and spill into Brazil.

    People are mocking and making fun to a certain extent of some very sensible articles written by very sensible people. Not the sensationalists or hype types, but very intelligent and refined individuals warning about some serious issues.

    Point to be considered is that with a lot to lose and with considerable sums of money exposed, these individuals are not blowing smoking into anyone’s behind. They are just aware of what can happen.

    Markets (please here read People) can Remain Irrational for very long periods of time. Nature of human beings…We resist, we fight; actually Is part of our nature. But we cannot change some some hard facts. We can manipulate them for so long, but we cannot change them.

    The main Problem with Bubbles ( that normally are only recognized as such way after the fact such as in 2007 July- october period, when the very first sharp drop occurred and until october everyone dismissed it as one more normal correction) is that these events occur when people least expect.

    Even when economic fundamentals are well in place, sharp crisis can take place. To illustrate this point I will would like to explore a case that could help bring some light into the topic real estate: Thailand in 1997!

    I would like to bring to memory the Real Estate Problem in Thailand in 1997 was a very particular one. That was an interesting turn. The country had a very good and sound economy, as many other asian countries – back them named the AsianTigers – did with vast potential for growth. The region was booming!

    There was nothing wrong with the economy per se; what triggered the situation to get out of hand was a combination of Credit facilities to nationals combined with massive International capital flowing into the particular segment.

    Regarding Real Estate, the objective is always the same: for some is the opportunity to realize the dream to own a home; for others is the time to explore the opportunity to make significant returns.

    In Thailand’s case, It got ugly, very ugly! The country came out ok at the end. But it was a mess; a real mess! And proof of the situation are some of the skeletons still in display in the heart of Bangkok and other key cities today. Projects that were never completed and ended up on court of law. A long process that tends to last decades.

    Very interesting was the fact that economically, the country was doing so well. Great credit rating, expansion, growth all at impressive levels. Yet, all of sudden things went sour. That was puzzling at best. According to Fundamentalists, by all accounts, the economy was thriving. Yet, the currency, the economy and the region were hit very very hard. And the mild spilled all over Asia, hitting great economies such as South Korea with an impressive growth record.

    Today it is Kind of Interesting/contrast to observe the country doing so well and see landscape of main cities such as Bangkok. Just taking look at images from the city, one is able to see the very new (some marvelous) new sky rises, financed quite substantially again by foreign capital inflow from international investors such as Middle east, Emirates and Gulf Concerns with capital diverted mainly from Dubai and Abu Dhabi. Interesting…

    What the scenario above have to do with Brazil and real estate in Brazil? I think, they provide a lot. They provide insight on what could happen if things don’t go as planned. And starting from a stand point that it is not a far fetched impossibility, one should explore a bit further here.

    With government intervention and refinance, the Brazilian Real Estate could still go on for years. Yet, if the panic button hits either Internally or elsewhere, then we coud see a different story.

    I am not a guru, fortune teller or time traveller; all I try to see and to pay attention are the actions of very smart professionals with a respectable performance in diversified asset classes and how they are positioning themselves for the months ahead.

    The way I read, there is deep within complex issues that have been dealt mainly with Announcements but without any real action – i.e. European turmoil, Bond Program- the Q.E. program in the US. For now they have not been dealt with and one watching the picture close, can sense that things are far from being fine.

    Coming back to Brazil I ask myself often one question: If the situation turns sour in Brazil somehow, who would be able to come for help? Which International Central Bank or Organization would be able to provide assistance if needed? Europe? USA? I doubt… Looking at how painfully they are dealing with their own mess currently, I really doubt. China? well, that would give them a great opportunity to jump in and snap assets at discount.. Just thinking loud here! :)

    What the scenarios above have to do with Brazil and real estate in Brazil? I think, they provide a lot. They provide insight on what could happen. And being it is not a far fetched impossibility. It is factual.

    Revenues from the large concerns will not expand. That is wishful thinking. Large Brazilian concerns from all different industries and sectors will be hit if things develop into a spiral. When that happens, the logical step is to cut costs. Cut costs in corporate lingo = layoffs… in plain language = FIRE PEOPLE. And since the world has been the world, it starts from the bottom up.

    If so, they can extend mortgage payments to zillion years. It will not stop defaults. No Income leads to defaults. Looking at the current ratios, it won’t take to long for people to default completely.

    In my personal opinion, the sign always comes in the form of steep sell offs in equities markets. That has not taken place all over, but Brazilian equities have not been at their best. That does provide some clues.

    One of the proxy’s I like to use to measure the health of the Brazilian economy are the prices of 5/6 Brazilian stocks: Vale, Petrobras, Bancos Itau/Bradesco, Brazil Foods and Ambev.

    My very humble opinion is that what is taking placing at this stage is the delicate/strategic selling of Brazilian equities. With Vale in particular I have mentioned the area of 18.80 as a very delicate zone. It passed that price zone with very little conviction two weeks ago. Ever since, it has weakened. And it is returning to the price zone that could lead to further drops as per Institutional Money positioning.

    Can it change? as everything else, it can. But, there has to be a catalyst of some form. I would like to think a good one for now, but I can’t find one.

    These drops are reflection of lack of conviction on what the market view at this juncture for the Brazilian economy overall performance in the near future. And, all things being equal, that will have an impact in every single sector of our economy.

    I am not in Brazil to feel/sense it very close. I can only imagine how the situation is. When I read the prices being asked for goods, the way credit is being extended and the percentages of salaries/wages that are allocated to service debts, I get surprised. Things tend to slow down. It is part of the process. When and how they do remains a questions mark!

    Does it mean Brazil will be in Shambles? I don’t think so. It will only create another Brilliant opportunity for bright and patient speculators to jump in and explore. Thriving on Chaos!

    To speculate means assuming risks. People are risk averse by nature; we all want the safest investment with the best possible return. That is wishful thinking. These are Rare opportunities, only possible when things go to an extreme. Case in Place: US real estate 2009 and equities around 2009.

    Funny to remember that not long ago, If one would mention or simply say the word investing back them people would Jump and call them Mad, perverse and insensible. Well, today one wonders really who was Mad…

    Many will get hurt. Mostly those not well capitalized will suffer and face considerable damage.

    Within the comments, there was one response that mentioned investors making a killing even at current levels. It is possible and it happens in all asset classes. The only thing I can comment here is the fact that sometimes, some bold and very aggressive, thrive in such opportunities.

    But they should always account for the unpleasant. When they are taken by surprise and cannot off load inventory – being that Condos, Land, Stocks, Commodities and thinking very bottom line such as a far to large inventory of food at a supermarket as an example – they will have to absorb losses. And they will be carrying inventory at SUPER PREMIUM. Now, that does hurt.

    In liquidation, such investors tend to relent and try to average down their losses by acquiring more products to try to offset losses. Fortunes have been whipped out this way. Some significant ones were actually were destroyed.

    Conclusion, I think all is relative. Only time will tell.

    Brazil does have malfunctions. Sad, but true! Brazil has also wonderful things to offer. The Great side of it and also true. It is a country with vast resources, with so much to offer. No doubt about it.

    Bubbles don’t start at once. It is a process.

    Looking back into previous situations to get a feel or indication one can make some general statements regarding the process:
    Normally, there is a significant drop in prices – corrections- in the order of 30% to 35% in prices. The market sees value and investors rush in to take opportunity of the Bargains. The market recovers. Sometimes it regains the same high level, even surpasses its most recent high levels or performances, making people believe that they are back in business. all back to Normal. And then comes the next wave of liquidation… That one unfortunately tends to get people with their pants down…Result of lack of funds to further fuel the process.

    The only solution is find a source of capital to finance the next wave… that is when it gets complicated. Nobody finds a good answer and the word Complex fills the gap as economists and analysts come the media not willing, capable or Honest enough to explain or expose what really happened.

    Real Estate, Equities, Silver, Gold and one can go back in History back to the Tulipmania in The Netherlands – Holland – to examine the process.

    Hope the comment proves valuable to other readers


  21. Diego says:

    Hi Rodrigo, very interesting all you are saying. Thank you for a deep analisys of the fenomenon. And what would happen with the Real vs Dollar when prices reach a 9% rental profit? would the Real fall hard or stay steady? are these situations linked? thanks

  22. Carter says:

    Hi Folks,

    I am currently doing some research on the real estate market in Brazil as it affects housing. I want to know more information about the drivers in potential bubble such as market prices, initial costs, speculative practices, land development issues, etc. I am invested in understanding the full scope of risks, as well as opportunities if there are any, and just get a bottom line understanding if the housing deficit will be reduced in a sustainable way (in all aspects if someone has that knowledge). Thank You!

  23. Carter says:

    By the way if any of you are willing to point me to websites, do offline email threads, interviews, or phone calls, I’d greatly appreciate it. Brazilians don’t deserve to go through what America went through, let’s make sure they don’t.

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